BoG: Elevated credit risks threaten banking sector recovery

The Bank of Ghana (BoG) has raised concerns about the ongoing elevated credit risk, which continues to pose a significant threat to the recovery of the banking sector. The Non-Performing Loan (NPL) ratio, a key indicator of credit risk, has surged from 18.7% in June 2023 to 24.1% in June 2024, reflecting the sector’s struggle in managing credit effectively.
Dr. Ernest Addison, the Governor of BoG, highlighted the considerable challenges banks face in managing credit risk, despite improvements in other performance metrics. The rise in NPLs indicates the need for continued vigilance and proactive management of credit risk to sustain the recovery trajectory. The BoG will likely focus on ensuring that banks maintain robust risk management practices and adequate capital buffers to navigate potential economic shocks.
Despite the elevated credit risk, the BoG has observed significant progress in the banking sector’s recovery and resilience. This progress is attributed to a consistent rebound in profits, adherence to recapitalization plans, and the enforcement of strict credit underwriting standards. The first half of 2024 showcased a continued recovery from the impact of the Domestic Debt Exchange Programme, with total banking sector assets growing by 33.3% to GH¢323.1 billion by the end of June 2024, compared to a 21.2% growth at the end of June 2023.
Profitability, liquidity, and efficiency indicators have also improved, reflecting a more robust financial health of the banks. The Capital Adequacy Ratio (CAR), a crucial measure of the sector’s health that reflects a bank’s capital relative to its risk-weighted assets, remained stable at 14.3% between June 2023 and June 2024 when adjusted for regulatory relief measures. Without these reliefs, the CAR was reported at 10.6% in June 2024, up from 7.4% in June 2023, indicating an improved capital buffer to absorb potential losses.
Governor Addison emphasized the importance of these positive trends, stating, “Banks’ consistent rebound in profits, adherence to recapitalization plans, and enforcement of strict credit underwriting standards will help ensure that banks remain on the path to full recovery and resilience.”
Ghana’s banking sector has undergone substantial restructuring over the past few years following the financial sector clean-up initiated by the BoG in 2017. The reform included the revocation of licenses of insolvent banks, consolidation of smaller banks, and the introduction of stringent regulatory measures aimed at enhancing stability and ensuring compliance with international banking standards.
The progress in the banking sector underscores the effective measures implemented by the Bank of Ghana to stabilize and strengthen the financial system. These measures included recapitalization requirements, enhanced supervision, and the promotion of sound corporate governance practices.

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